Weighing NAFTA - pros and cons of trade agreement - Editorial

National Review, Oct 18, 1993

SINGAPORE FELL, according to legend, because its guns were pointed out to sea, and the Japanese had the bad manners to invade by land. In the battle over

NAFTA, an equally misdirected strategy is being employed by both the Administration and sympathetic media. They lob concessions at labor and Green protectionists among congressional Democrats to win them over, and they fire economic logic at simple-minded protectionists outside the Beltway like Ross Perot to discredit them. The second task is easy enough, since the principal protectionist claim is that if NAFTA goes through, U.S. investment and jobs will be sucked inexorably southward. In fact, by eliminating Mexican tariff barriers on American goods, NAFTA would reduce the incentive for U.S. businesses to relocate their factories inside Mexico.

But the first task is trickier. Most Democrats, unpersuaded by the concessions, are sticking with the AFL-CIO and the Sierra Club in their opposition to NAFTA. Which means the Administration must rely on Republicans who don't need persuading that free trade is a good thing, but wonder if NAFTA will still be free trade with Mr. Clinton's concessions. The Administration has no answer to that; its guns are pointed in the wrong direction, shooting down the arguments that free trade damages the environment and guts labor protections.

Even before the side agreements, however, NAFTA was not free trade, strictly speaking, but a managed-trade agreement. It reduced trade and investment barriers between Canada, Mexico, and the U.S. in a gradual and regulated way--"snap-back" provisions allow some reimposition of tariffs in case of "import surges"--but maintained existing national barriers against third countries. Indeed, it raised those barriers slightly by strengthening the "rules of origin" to ensure, for instance, that Japanese manufacturers could not gain tariff-free access to the American market by assembling autos in Canada from mainly Japanese-made components and then exporting them to the United States.

The direct economic consequences are likely to be modest for America in both the long and the short term. First, U.S. tariffs are already low-on average 4 per cent--so that their elimination should not create massive job dislocations. One estimate is that the current round of defense cuts will displace ten times as many workers as NAFTA. Estimates of net job gains or losses are not only highly speculative, they are also trivial--a net gain or loss of 150,000 or so over 15 years in an economy which created 19 million jobs in the 1980s. Second, although Mexican tariffs are higher, at about 10 per cent, they have not prevented a sharp rise in U.S.-Mexican trade in recent years, in which the U.S. enjoys a substantial trade surplus. Third, the Mexican economy is only one-twentieth the size of our own. Even if the entire flow of additional Mexican investment--about $15 billion a year--were financed solely from U.S. sources, it would amount to only 1 or 2 per cent of our annual savings (and, sans NAFTA, would probably have gone to the Far East anyway). And, finally, because NAFTA diverts trade rather than creating it, there will be losers, but they are likely to be located mainly in third countries for instance, Taiwanese manufacturers who lose ground in the U.S. market to less efficient Mexican producers, or European investors who are deterred by the rules of origin from setting up plants in Canada or Mexico. American consumers will be better-off than at present--but less well-off than they would be under a multilateral GATT deal covering the same ground.

And there's the rub. Because NAFTA's direct economic impact, though on balance favorable, will certainly be modest, a great deal rides on the wider long-term implications of the agreement. Milton Friedman supports NAFTA as a step toward genuinely free trade; Clyde Prestowitz, a shrewd "trade hawk" (neo-protectionist?), supports it as creating an extended domestic market which makes Mexico an "export platform" for America in the coming struggle for trade. Which of these views will prove correct? Will NAFTA with the side agreements, as described by Tom Bethell (p. 34), extend regulation as much as it liberalizes trade? Will it strengthen the free-market reforms in Mexico or overwhelm its burgeoning capitalism with First World labor and environmental rules that a developing country cannot afford? Above all, does it symbolize a confident America looking outward to its neighbors or a fearful America constructing its own trade fortress in a mercantilist world of trade wars? To these questions we shall return in the next three issues.